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Samsung vs. Apple: The Capital Spending Battlefield

In The New York Times on Monday, I examined how Samsung Electronics has emerged to become a true challenger to Apple, the most profitable technology company in the world.In interviews, Samsung’s executives emphasized the company’s market research and design processes. But the other crucial parts to the company’s success are its huge investments on capital expenditures and marketing, far exceeding any other consumer electronics company.Even bigger than research and design is Samsung’s capital spending, or its investment in parts and the equipment required to produce them, like milling machines used for cutting and fabricators used to make semiconductors. In 2012, Samsung reported $21.5 billion in capital expenditures, more than twice Apple’s investment of $10 billion. It says it expects to spend about the same amount on capital expenditures this year.Horace H. Dediu, a mobile industry analyst at Asymco, says Samsung’s focus on capital spending was the main reason for why it is so successful. Historically, it built its business around producing and selling components to other manufacturers, including Apple, Sony and Hewlett-Packard. That gave it tight control over the components market, similar to when Henry Ford owned the facilities for manufacturing cars, like coal and iron ore mines, glassworks, rubber plantations and sawmills.Owning a broad manufacturing process not only puts Samsung in a position of strength to sell components. By working with so many companies, it also gains insight into how to plan investments for successful products, Mr. Dediu said. Having worked closely with Apple and other companies for years, Samsung can easily get a sense of how to plan production and distribution of a successful phone, Mr. Dediu said. It is his supposition that Apple attacked Samsung in the courts out of a feeling of betrayal by a partner, more so than a defense of intellectual property.“The betrayal was we trusted you as a partner, and we didn’t think you would actually take that business we built for you with our sales funding your capacity to build these products,” Mr. Dediu said. “We didn’t think you’d take those sales you made with us and convert them into ammunition against us.”In August, after Apple’s victory against Samsung in a patent lawsuit in federal court in California, Timothy D. Cook, its chief executive, sent a memo to employees that said the lawsuit was about more than protecting intellectual property.“We chose legal action very reluctantly and only after repeatedly asking Samsung to stop copying our work,” Mr. Cook wrote. “For us, this lawsuit has always been about something much more important than patents or money. It’s about values. We value originality and innovation and pour our lives into making the best products on earth. And we do this to delight our customers, not for competitors to flagrantly copy.”Samsung admits that the company is trying to shed the image of being a manufacturer. That partly explains why it is spending so much on marketing. In general, Samsung spends more on advertising than Apple and Microsoft — in 2011, Samsung spent $3 billion on ads, compared with Apple’s $933 million and Microsoft’s $1.9 billion. For marketing over all, which includes advertisements, sales promotions and public relations, Samsung spent $11.4 billion last year.Its advertising has been more prominent in other countries, but in America in the last year it has been especially aggressive with its promotion of theGalaxy S III. It started a campaign for that phone in June, which included ads on television, online, in print and in outdoor areas, like posters at bus stations. This year, Samsung has also been a sponsor at New York’s Fashion Week, and it advertised during the Super Bowl broadcast this year.“In the past year, you’ve seen us amplify the Samsung brand in the U.S., especially in the mobile category,” Justin Denison, chief strategy officer of Samsung, said in an interview. “That has been helping communicate to consumers that we really want to stand for innovation.”What are your thoughts about Samsung’s approach to technology products and marketing?